An Insider Bought (Back) In At SEI Investments

Joseph Ujobai, an executive vice president at SEI Investments (SEIC), purchased 5,000 shares of the company's stock on Dec. 17 at an average price of $22.56 per share. This gives Ujobai almost 13,000 shares held directly in the wealth management and investment advisory company. Interestingly, he had sold 42,500 shares in early November at a slightly lower price.

So it's possible that he has changed his mind about the company's prospects -- generally, for an insider to buy shares in the company that's responsible for their income they would have to be -- but there may be some other explanation here. We'd also note that several other company officers are selling shares, though insider selling is generally not that informative as the principles of diversification mean that it makes sense for insiders to sell.

Revenue was up 8% in the third quarter compared to the third quarter of 2011, and higher than the average amount SEI had earned per quarter in the first half of 2012 as well. However, costs have also risen and the result was that SEI reported only a 3% increase in net income. Sales were up for all four of the company's primary classes of clients: private banks, investment advisors, institutional investors and investment managers.

Given this fairly modest growth, it's surprising to see SEI trading at 21 times the company's trailing earnings. Even if we annualize its most recent quarter, we get a P/E of 20. Certainly growth could lead net income even higher, but we think that a higher growth rate would be necessary to justify the current valuation.

Sell-side analysts expect $1.43 in earnings per share in 2013, a 21% increase from what is expected for this year, and that growth rate seems high to us. The company announced plans to expand its stock repurchasing program -- it had reported almost $400 million in cash and cash equivalents on its most recent balance sheet compared to about $230 million in total liabilities, so it has plenty of room to do so. But we think there would have to be an acceleration of earnings growth as well to hit that target. In addition, this projection implies a forward P/E of 16, which would require SEI to achieve additional growth beyond that point.

We think it's useful to compare SEI to two larger peers, Bank of New York Mellon (BK) and State Street (STT). While there are of course differences between these three companies' business mixes, BNY Mellon and State Street are comparable and their trailing earnings multiples are in the 12 to 14 range. In addition, in the third quarter each of these two companies reported a double-digit percentage increase in earnings compared to a year ago.

It's also possible that Ujobai's purchase came because he expects developments that will benefit the entire asset management industry, not just SEI, and these trends would benefit these companies as well. As a result we think that they are better places for an investor to look for value.

Insider purchases are generally bullish signals, and it's possible that SEI in particular is going to perform well going forward. However, in a way we have a net sale of shares here, given the fact that Ujobai sold a larger number of shares fairly recently, so perhaps the purchase should not be as meaningful. The stock has a higher valuation than we are comfortable with, given its recent quarterly report, and in particular SEI is trading higher than two larger-cap peers. It seems best to avoid the stock.